Managing volatility: the race to conquer an uncertain future in the CV industry

Megatrend development is enacting a profound change on the commercial vehicle sector, writes Roland Berger's Wilfried Aulbur, Walter Rentzsch, Frank Pietras and Wenbo Yuan

The transportation industry has seen solid growth over the last 20 years. Markets like the EU and North America have recorded a CAGR of 3.8% during this time frame while emerging markets like India are even more dynamic with growth rates close to 10%. A well-oiled logistics industry was taken for granted in the past, but the COVID crisis and related supply chain constraints have reiterated how important it is to be able to move goods and people from A to B.

Considering positive fundamentals and a renewed appreciation, the industry should be feeling pretty positive. Yet, a certain nervousness seems to be pervasive; a feeling of uncertainty that is not only driven by pandemic and geopolitical events, but also by a fundamental transformation that is enabled and driven by technology.

As can be seen in the figure below, the industry and related sectors face numerous challenges.

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A continued push for sustainable freight transport drives large investments in electrified and hydrogen powertrains. Autonomous trucks, with their massive cost savings potential, will disrupt established business models and shift the power balance in the truck ecosystem. Asset tracking, predictive maintenance and other digitisation efforts improve efficiency and transparency in the logistics chain and change the way companies do business. Warehousing will also have to adjust to some of these trends, particularly regarding process flows and operating hours to enable autonomous trucks. In addition, technology innovations such as AMRs and AGVs impact and change warehouse operations. Last mile delivery needs to be more efficient, especially due to increasing e-commerce volumes, and will drive adoption of new vehicle concepts, decentralised depots, delivery robots and more. Customers will drive transparency along the supply chain both from a delivery as well as a sustainability perspective enabled by blockchain and other technologies.

As a result, the environment in which companies operate is more interconnected and complex than ever before. New trends emerge quickly and can arise from non-traditional sources. Understanding this environment, separating the noise from the essential, and translating this into clear strategic roadmaps for companies is a tremendous task.

Who will lead?

Who will win this multi-legged rat race? Established truckmakers or up and coming start-ups? The transportation industry is a conservative industry, hence a base assumption could be that established OEMs and suppliers have the upper hand. Yet, they face several challenges.

Take the current semiconductor crisis as an example. Automotive OEMs and suppliers by and large did not understand that semiconductor suppliers could not be treated like traditional component suppliers. Reducing orders during COVID meant that supply capacity was allocated elsewhere. When orders picked up again, capacity was no longer available. The overall semiconductor buy of the automotive industry is about US$50bn, about the same volume that Apple buys yearly. Automotive customers require a large amount of complexity and variation. Apple, hardly any. Investment cycles in the semiconductor industry are also long: it takes about four years from starting a factory project to delivering chips to an automotive plant. Hence quick fixes by adding capacity are not feasible either. The result was a continuing crisis that is likely to impact the industry through 2022.

Culture is another challenge. Many of the new technology companies focus on service-based business models. A service culture is very different from the product-centric culture of today’s truckmakers and suppliers. Several players are deploying significant resources to achieve this transformation either organically or inorganically. Many have found it difficult to make the transition and earn money in the process.

Managing and succeeding in the technology-driven transformation of the industry has become an existential, do or die question. All organisational resources will be mobilised to ensure business continuity

This transition becomes even more pressing as traditional business models come under threat. For instance, with electrification and autonomy, truckmakers potentially lose two areas of competitive differentiation and value addition—the powertrain and the cabin. Compensating these losses in revenue and profit must come from new business ideas, many of which will be service-based.

Legacy is another area of concern. Investments in internal combustion engines are today investments in businesses that have a residual value of zero some time in the not-too-distant future. Yet, they are necessary to be competitive in the short term and bind significant financial resources. The brand promise of safety and reliability is an argument to buy new technology from existing players but implies longer testing and validation cycles and lower risk tolerance than start-ups leading to longer development times and delayed launches of new technology. Existing relationships with dealers and customers are based on a thorough understanding of the industry and its use cases but limit operational flexibility, such as in the transition to online sales or the exploitation of autonomous driving technology.

Funding is equally a concern for incumbents. Traditional players are listed and have a difficult time attracting venture and other risk capital for the development of new technology. This leads to investment constraints and can impact development times negatively, especially when competing with entities that are backed by powerful investors or cash-rich parent companies as is the case in autonomous technology. Funding constraints also imply that traditional players cannot pursue all the different technology angles that are relevant for their business at once. They need to carefully pick their battles while at the same time competing with 100% focused start-ups in each area.

Potential disruption

Looking at these challenges, truckmakers and traditional suppliers are unlikely to drive the technology transition in the transportation industry in its entirety. But does this mean that they will ultimately succumb to more nimble and aggressive players?

This scenario is equally unlikely. Truckmakers and suppliers have built up industry and use case understanding over decades that is relevant for the development and deployment of new technology and difficult to replicate quickly. Brand reputation, solid networks, customer reach and global scale are other factors that clearly strengthen the hand of existing players. More importantly, many of the players today recognise that they simply do not have a choice. Managing and succeeding in the technology-driven transformation of the industry has become an existential, do or die question. All organisational resources will be mobilised to ensure business continuity.

Many existing OEMs and suppliers in the commercial vehicle industry are here to stay, but a few may not be able to successfully manage the transition. The ones that do, will become very different from what they are today. They may also find themselves amongst new company. Take Tesla, for example. If Tesla’s Semi lives up to its promise of a reliable vehicle with a daily driving range of 500 miles and a price of US$180,000 it will change the composition of the market and further accelerate the speed of change and volatility of the industry.

About the authors: Walter Rentzsch is a Principal and Wilfried Aulbur a Senior Partner in Roland Berger’s Chicago office; Frank Pietras and  Wenbo Yuan are Partners in Roland Berger’s Berlin and Shanghai offices respectively

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